Markets in September

September has historically been the worst month for equities and has been down the last four years. However, with the Fed finally cutting rates and China implementing larger than expected monetary and fiscal support, equities were able to keep this year’s bullish momentum.
The S&P 500 rose 2.1%, with 8 out of 11 sectors positive led by Consumer Discretionary, Utilities, and Communication Services up 7%, 6.6%, and 4.6% respectively. Emerging markets were the big beneficiary of monetary easing from China up 6.7%.
The Federal Reserve lowered rates by a larger than anticipated 50 basis points. Jerome Powell emphasized that the larger than expected cut was a “recalibration” of rates due to their confidence that inflation is moving sustainably towards their 2% target and not because of concerns that the economy was slipping into a recession. The SEP report showed that FOMC participants are expecting two more 25 basis point cuts this year, followed by 100 bps in 2025.
Treasury yields fell across the curve and the 2yr/10yr yield curve finally disinverted. 30yr mortgage rates have fallen close to 6% from close to 8% a year ago.
Economic data remained mixed but overall showed continued resilience. The job market has been investors' biggest worry as data has previously shown signs of softening. However, the Sept jobs report showed 245k jobs added, significantly above the 150k expected.

Fed Rate Cut: What It Means for You

With the latest 50 basis point cut by the Federal Reserve, investors are left wondering about the implications for the market and the broader economy. Our CIO, Kyle Cain speak insights into what this could mean for the economy and your portfolio. Watch the video by clicking here.

Why It Could Keep Going Higher

The primary driver of U.S. economic growth is the U.S consumer and most Americans are fully employed and enjoyed significant wage gains over the past couple years. Most with low debt service costs.
Inflation continues to decelerate, albeit slowly and the Fed has initiated its monetary easing with a larger than expected 50 bps cut.
Earnings are expected to grow between 8% - 12% in 2024 with continued growth in 2025.
Fiscal policy is still providing a tailwind to economic growth.
Artificial Intelligence capex and promises of productivity gains are still in the early stages.
There is a lot of cash still on the sidelines and investors may put it to work on the fear of missing out.

Biggest Risk

Inflation and the Fed’s response to get it under control are still the biggest risks the economy faces currently. Fed policy impacts the economy with a significant lag so it is hard to determine what the future effects will be from the current rate hikes.
Valuations are stretched and if earnings do not live up to expectations, a sell-off could occur.
Some research reports indicate that excess savings accumulated during the pandemic may have already been depleted and consumer spending is showing signs of cooling.
Credit card debt has reached an all-time high. Delinquency rates are rising on auto loans and credit card balances, and we’re starting to see an increase in bond defaults, albeit all from below average levels.
If the economy does begin to slow down, high wage costs may force employers to lay off workers to maintain profit margins.
Additional bank failures and commercial real estate defaults.
Further Geopolitical tensions.

Economic Data

Core CPI rose 3.2% over the year, in line with expectations.
Core PCE rose slightly to 2.7% but in line with expectations.
US ISM Manufacturing PMI remained in contraction at 47.2
US ISM Services PMI improved significantly to 54.9.
Retail Sales increased 0.1% in August over the month, following an upwardly revised 1.1% increase in July.
Consumer sentiment improved to 70.1 in Sept.
Federal Reserve Beige Book revealed the number of Districts reporting flat to declining economic activity rose from five to nine in the current period. Only three Districts saw economic growth.

What We Are Doing

With the Fed now initiating an easing of monetary policy we believe this will help the economy maintain its expansion even if at a slower pace. We are still optimistic that the most important metric for stock market performance, which are corporate earnings, will continue to grow into the next quarter. However, with valuations high we maintain a neutral equity allocation and will likely pair some gains during additional rallies.

If we see any more patches of volatility into the elections would likely use that as a buying opportunity. Rates dropped coming into the Sept Fed rate cut but have been creeping higher since as the economy maintains solid growth. As the 10-year Treasury approaches 4% or higher, we will use this back up in rates to add to fixed income duration and lock in the higher rates.

We added an emerging market bond fund to add diversification which should perform well as the Fed cuts rates and the dollar weakens. We will continue to watch the economic dynamic carefully to take advantage of opportunities as they present themselves.

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